Welcome to our 2010 edition of Property Matters.
"Catching the wave", the theme of this edition of Property Matters, is about opportunity and timing. Amid a current of uncertainty around the new Government's plans and with the possibility of a double-dip recession on the horizon, it is the bold who will be looking to seize the moment. Here at Mishcon de Reya we are certainly doing so, as illustrated by our recent new hires and our investment in areas where we consider there will be continued growth and a higher degree of activity.
I hope you enjoy this edition - a special thank you as always to our editor, Susan Freeman.
A selection of deals our Real Estate team has advised on over the last year.
Acting for funds advised by developer Delancey and Invista on the development of the prestigious Rolls Building in Fetter Lane, London EC4. This will house the new Commercial Court, which will handle work undertaken by the Chancery Division, the Commercial Court and the Technology and Construction Court. We are currently dealing with the ongoing letting programme for the upper floors of the building.
Advising on the sale of the 300,000 sq ft O2 Leisure and Retail Centre in Finchley Road, London NW3, for longstanding clients Matterhorn Capital and Palos Investments for £125.9 million to Land Securities. Also acting on the acquisition of a portfolio of hospitals operated by and leased to Spire Healthcare for £54.5 million from Quercus Healthcare.
Acting for investment vehicles backed by Foxtons founder Jon Hunt in the purchase of investment properties to the value of £100 million plus. The most recent was the £23 million purchase of 147/150 High Holborn, London WC1, from the Prudential. Others were the purchase of Macmillan House in Kensington, London W8, for £60 million and 77/95 Victoria Street, London SW1, for £20 million.
Acting for leading luxury online fashion retailer Net-a-Porter on its 15 year lease of 42,000 sq ft of new office space for its London HQ at Westfield London, above the shopping centre's luxury village.
Also acting for Gymbox on the lease of its 19,650 sq ft state of the art flagship gym at Westfield London which will open next year.
Acting for niche developer Manhattan Loft Corporation on various developments including the acquisition, joint venture and development of Edison House, London NW1, and a new boutique hotel in Marylebone, London W1.
Advising Manchester-based Citybranch on its joint venture development with Development Securities of a mixed use scheme at Hale Barns in Cheshire. The scheme, which will have an estimated completion value of £35 million, will include the redevelopment of the Square Shopping Centre as a supermarket-led scheme.
Acting for Moscow-based restaurant group Novikov on its lease of 50 Berkeley Street in Mayfair, London W1. The 19,000 sq ft former Grand Prix restaurant will be a UK debut for Novikov Restaurant Group, which has 30 restaurants in Russia.
Harnessing the Wave
The new Coalition Government has already published its full Coalition programme, a Queen's Speech and an Emergency Budget. However, the future of planning law is perhaps only marginally less clear than it was before the election. As we have discovered from both of the major Planning Acts of the previous Government, the success or failure of planning policy and law turns on the precise detail. Even the most ardent critics may forgive a lack of that at this stage.
Nonetheless planning and environment were two policy areas where there was already much agreement between the two parties before the election, so there are few surprises so far. Both focused on greater community involvement in planning and a move away from regional housing targets and regional government generally. They have also both been opposed to airport expansion in the south east and to the establishment of the infrastructure planning commission (IPC). The IPC will be abolished, although the details of what is to replace it and the fate of the Community Infrastructure Levy are still unclear. The temptation felt by governments of all colours to tinker with the planning system means a simple return to the pre-2008 position is highly unlikely. Both have also supported ideas for third party rights of appeal, which has caused considerable disquiet in the development industry, but this also does not appear explicitly in the programme.
One area in which the Coalition made its position immediately clear is on the future of nuclear power. The ban on public subsidy, and the Liberal Democrat opt-out if any new sites are proposed, means the focus turns very clearly to renewable energy. The ability to meet carbon reduction targets committed to by the previous Government (let alone any other aspirational targets which are to be pushed for) will be governed by their ability to deliver the next generation of clean energy supply. Some of this will come from commercial scale wind and wave, both on- and off-shore. Anaerobic Digestion (AD), which was virtually unheard of a few years ago, features strongly in the Coalition agreement. AD involves turning waste, particularly food and garden waste, into biogas for energy generation. Generally AD is considered much more environmentally friendly and less bothersome to neighbours than traditional incineration.
The remainder of generating capacity is likely to come from carbon capture and storage or other new "clean" technologies. The proposed replacement for the IPC will have to deal swiftly with the challenges posed by various consents required for these kinds of developments, balancing the needs of the soon-to-be newly empowered local communities. Add this to the existing constraints on housing growth created by capacity problems in the transport and water infrastructure, and any new body or process will have a very hard job to perform.
New commercial scale generating capacity is only one part of delivering a "low carbon economy". The rise in energy efficiency standards under Labour will continue as will incentives for on-site generation of electricity in new and existing properties. Wind, wave and solar energy businesses will be encouraged and incentivised so far as the state of the economy can allow. The planning system and the Green Deal for households will continue to encourage on-site micro generation and energy efficiency. The programme includes the presumption in favour of sustainable development from the Conservative green paper on planning, so we may well find energy use being one of the key design features of new developments above. However, the cost of that in terms of scheme viability in an uncertain new planning system is something which will not have passed by the Government, given its acute focus on the recovery.
Now is a time of opportunity for green industries and green developers, particularly with the confirmation in the Budget of proposals for a Green Investment Bank. Greener developments can often be seen as more neighbour-friendly which in an era of new localism may tip the balance. As the new Government beds in and tries to turn its general policy direction into specific proposals, now is the chance to be heard and make a real influence on proposals before they become entrenched. In the meantime, as some of the Labour legislation is unpicked and new proposals passed through parliament, we will be on the lookout for opportunities and pitfalls to allow clients to be in the best position to benefit from development opportunities, whatever happens when the political dust has finally settled.
Development and Urban Regeneration
Planning and Environment
What happens if developers' forecasts turn out to be great works of fiction?
The aim of forecasting is to be as accurate as possible. However, as the Met Office will attest, this can prove to be easier said than done. Developers marketing sites to prospective tenants will frequently be called upon to make predictions about the completed development, both during negotiations and in their marketing materials. Often they will be relying on information in reports supplied by third parties. And it is inevitable that, on occasion, these forecasts will overstate the potential of the development.
A recent High Court decision in Foodco UK LLP v Henry Boot Developments Ltd, which clarifies the law in this area, will come as a relief to "forecasters". It holds that where a developer honestly believes its predictions, it will not be liable if the development fails to live up to expectations.
Fraud or honest belief?
In the case, six retail and leisure operators including KFC and Burger King franchisees and sandwich chain Eat entered into agreements for lease at a motorway services facility close to the Channel Tunnel. The developer's marketing material, and a specialist report on which the marketing material was based, predicted 88,000 visitors a week on opening. But this prediction proved to be "wildly optimistic" when actual visitor numbers barely reached a tenth of those predicted and the development turned out to be a commercial disaster. The tenants alleged that they were induced to enter into the agreements by misrepresentations relating to the features of the development, the extent of motorway signage, the likely number of visitors and the facilities which the site would offer. Some of the representations were made in writing, but the tenants also alleged that these were supplemented by oral representations.
Each agreement provided that the tenant was not relying upon any representation or warranty, whether written or oral, made by or on behalf of the developer save for written replies given by the developer's solicitors to the tenants' solicitors' enquiries. This standard "entire agreement and non-reliance" clause was held by the High Court to be effective. The court further held that this clause restricted the tenants' claims to one of establishing that a fraudulent misrepresentation had been made by the developer.
An action for fraudulent misrepresentation occurs where a false representation has been made knowingly, without belief in its truth, or recklessly. The court must enquire into the subjective state of mind of the person making the representation, and the onus is on the claimant to prove absence of honest belief. In this case, the trial lasted more than a fortnight while all of the witnesses were cross-examined at length.
Lessons for each party
The judge, Mr Justice Lewison, eventually held that the developer had an honest belief in its predictions and therefore none of the key representations were false. In relation to the predictions about visitor numbers, he found that the developer had reasonable grounds for its belief based on the specialist report it had commissioned. As for the representation that the development would be a "motorway service area", the evidence showed that none of the witnesses - including the developer - fully understood what this term meant. Each tenant had been represented by lawyers, and Lewison J's view was that they should have undertaken their own due diligence or, as stated in the agreement, ensured that their solicitors raised specific enquiries in relation to representations made so that they could rely on the replies.
He also held that there is no duty to keep a counter-party informed about ongoing negotiations with third parties. The developer had engaged in ongoing negotiations with the Secretary of State regarding motorway signage and with coach operators regarding parking facilities. However, all that mattered was the state of affairs at the date on which the agreement was concluded.
A duty to correct false information would arise only if the developer knew or did not care that its previous representations had become false. The judge found that the developer continued to believe that the report it had commissioned was reliable, and it had actually acted on the report to its own detriment. He commented that, with the benefit of hindsight, it would have been prudent for the developer to have asked for a further report to be commissioned in the light of contradictory information it had subsequently received, but it was impossible to say whether that would have changed the report and, if so, to what extent. That did not amount to dishonesty on the developer's part.
Predictions, by their very nature, are unlikely to be completely accurate. Developers and landlords should be aware that they are under a duty to communicate any changes that make their original representations false. But, above all, purchasers and tenants must make sure that they carry out their own due diligence, and should ask their lawyers to raise formal enquiries in relation to representations made by a developer and on which they are seeking to rely.
Real Estate Dispute Resolution
Development and Urban Regeneration
The Reluctant Developer:
Susan Freeman talks to Jamie Ritblat
Jamie Ritblat, scion of the family often affectionately referred to as property royalty, rarely gives interviews. So I was understandably delighted when he agreed to talk to me at Delancey's offices in Berkeley Square.
I hesitated slightly before asking why he decided to go into property but the answer was not the obvious. Instead, Ritblat revealed a lifelong interest in architecture, design and "doing things up", and how as a child he always preferred lego to computer games. He does admit that there was a "blood link to property so some of it may have rubbed off!"
In 1985/6 he grasped the opportunity offered by Elliott Bernerd to work at West End agency Morgan Grenfell Laurie. Armed with the benefit of a "20 minute property download from his father" (which Sir John thought was long enough!) he discovered that agency was all about relationships.
He liked the people and enjoyed learning "on the hoof". He concedes that his family background did make him "something of a curiosity", which meant he got more access than his peer group, giving him an initial advantage. But importantly, he was able to capitalise on this and proved to be a sufficiently good salesman to build a career on the back of it. By the end of 1989 he was ready to move on. His planned move to another agency was scuppered by his father who, faced with his initial resistance, mobilised the British Land board to persuade him to join them. This was a seminal decision as, having with immaculate timing sold at the top of the market, British Land had cash and credit lines and was well placed to take advantage of everything that had gone wrong in the property sector. His colleagues were "fantastically knowledgeable and experienced: you can't put a price on the value of learning in that environment".
Ritblat had the freedom to invest and take advantage of the market to build a new portfolio. Over five years, British Land spent £3-4 billion on sites ranging from supermarkets to city offices including 122 Leadenhall Street (now a planned redevelopment known as the Cheesegrater) and culminating in their purchase of Broadgate. His ambition "to be his own person" led him to leave in 1995 to set up Freehold Portfolios Estates, a micro version of what is now Delancey.
At Delancey, their aim is to be commodity-driven and to differentiate themselves as managers by using their strong sector relationships, credit and network but with real estate always central. Describing himself as "always a reluctant developer" who builds more than he would wish to, Ritblat explains that his business is to make money. As soon as development becomes an emotional experience it moves away from business principles. "Our skill set is to be dispassionate and see where we can add value. It starts and finishes with the money." While Ritblat doesn't feel the need to leave his mark on the urban landscape, he is clear that as a developer you need to do what you do well and there is value in doing so. Delancey's successful Islington scheme has won awards and is part of the urban fabric. Ritblat also cites the Dickins & Jones development in Regent Street as a good example where "the maths work and it's a fantastic piece of real estate".
A snippet in a Sunday paper which caught his eye led to Delancey diversifying into schools with the purchase of Alpha Plus. This ticked the boxes both in terms of the real estate and long term sustainable cash flow. Delancey may buy more schools but they are otherwise now very focused on pure real estate. They have had some great successes and Ritblat is clear that "the best things are always those we understand best". In fact, the only deal that he admits he could have done without was their "foray into hotels".
Ritblat sees things as more uncertain than a year and a half ago as we are now in constantly uncharted territory, where history and behavioural patterns don't help. "The scale of government intervention is like monopoly money and these circumstances mean it's trial and error for the State." But while he cannot predict what will happen in the interim, he believes the human condition is designed to thrive. People and particularly this country are resilient and will get through it.
Although Ritblat prefers to avoid doling out advice to the younger generation entering the sector, he advocates doing time in agency - "making the tea" as he terms it. "There are no shortcuts and the book won't help you." In agency you see a huge spread of client activity and it gives you a broader horizon. Some will make the transition to the client side but the mindset of a principal is different - you have to be willing to take risk. In his view, most good business "starts and finishes with common sense".
When he isn't in the office, Ritblat spends time with his four children - three girls and a boy aged between five and 12. He loves the countryside, collects art and enjoys travel - but is never far from his BlackBerry. He satisfies his creative side with building projects and bee-keeping.
Has his father, Sir John, been a big influence? Of course, and Jamie is very grateful for it. He has also been lucky with his investors, including financial guru George Soros. They have all been strong influences and mentors. He also cites his children as key influences, changing his out-look and emphasis, and hopes that all these influences will continue to change and evolve throughout his lifetime.
Going forward, Ritblat asserts that now is not the time for things that require extensive computer modelling but "a time to stick to the knitting". Delancey's aim is "to know their own back yard well" and the company does not harbour desires for a global empire. As Ritblat firmly believes: "If you work hard enough you find deals - you need to work harder and smarter. You can't sit at your desk and wait for the phone to ring."
Development and Urban Regeneration
We live in changing times, especially when it comes to adjudicating in construction disputes.
Even when faced with a process that has been extensively litigated over for the past 13 years, and which is now the subject of new legislation, the courts are still able to adopt a new approach and change accepted practice. Some of the recently appointed judges in the Technology and Construction Court (TCC) have developed the law relating to adjudication along unexpected lines. Although this can make it somewhat harder for lawyers to advise on exactly how an adjudication may end, it does indicate that courts are moving away from their previously fairly inflexible approach.
In December 2009, in a case in which Mishcon de Reya was involved (Enterprise Managed Services Ltd v Tony McFadden Utilities Ltd), the TCC first indicated that some cases were too complicated to be resolved in a 28 day adjudication. The judge concluded that if a decision could not be reached impartially and fairly within the time limit, then an adjudicator should resign and leave the parties to fight elsewhere. How that sits alongside the often-quoted statutory requirement to permit parties to refer disputes to adjudication "at any time" is yet to be seen.
This interference in the right to adjudicate was again demonstrated in Mentmore Towers Ltd v Packman Lucas, another recent case in which Mishcon de Reya acted. Here, the TCC took the rare step of granting an injunction to prevent the taking of any substantive steps in an adjudication. In this instance, the argument was that the party seeking to adjudicate had acted unreasonably and oppressively, such that they should not be allowed to continue with the adjudication process.
Contrast this with the decision of the same TCC judge in Yuanda (UK) Co Ltd v WW Gear Construction Ltd. This case involved a contract with a clause which provided that, should the trade contractor commence an adjudication, it would have to meet all of the employer's legal and professional costs - a not uncommon clause. Although there had been a decision on such clauses in 2000, the TCC judge took the view that such a clause would "clearly discourage a party from exercising its right to refer disputes to adjudication" and therefore fell foul of the legislation. The court decided that it could replace the whole of the adjudication clause with the statutory provisions set out in the Scheme for Construction Contracts.
We are also seeing an increase in the courts substituting their own views for those of the adjudicator. In Geoffrey Osborne Ltd v Atkins Rail Ltd, the court moved away from the long established view that it was impossible to separate the good parts of an adjudicator's decision from the bad. It held: "If there is part of an adjudicator's decision that can be isolated and determined by the court, [and] if the court considers that it would be just and expedient for the court to do so, such a course" should be adopted.
The practice of adjudication is likely to be changed dramatically by the Local Democracy, Economic Development and Construction Act 2009, which received Royal Assent on 12 November 2009 (although the relevant sections are not yet in force). The main impact of this legislation on adjudication is to remove the requirement that only those contracts which are made in writing can be referred to an adjudicator. This, of course, means that the opening argument in many adjudication proceedings will be as to what the terms of the contract actually are. If disputes where there is no doubt as to the terms of the contract can be considered too complicated to be resolved within 28 days, there is a real risk that adjudicators will shy away from making decisions on the terms of oral contracts. This puts us back into the hands of the courts - which adjudication was supposed to prevent.
The net result of all of the above is that, rather than closing down the opportunities to challenge adjudicators' decisions, the recent case law and legislation appear to be opening up different avenues. These bring new considerations for all parties to construction contracts.
Real Estate Dispute Resolution
Roundtable discussion: Catching the Wave
This edition of Property Matters is about "catching the wave", which for us represents the importance of split second timing, of grasping opportunities as they arise, the need for an element of courage and the influence of change and innovation. It is early days and we are only just beginning to get to grips with the implications of the new Government's plans but we do know that they will have a wide-ranging effect on all aspects of the way we and our clients do business.
Daniel Lipman: The property market continues to be driven by the availability of cash. We can see that the clients who we acted for on commercial investment purchases last year have really reaped the benefits and many have already turned these for a substantial profit, sometimes in a matter of months. This really shows the crucial role of timing and the need to have the confidence to grasp the available opportunities quickly.
Nick Minkoff: Of course funding continues to be an issue but we are finding that clients with a proven track record are able to source funding, although LTVs are more cautious. For the banks it's very much back to the basics of bank lending, which frequently seemed to go by the board in the heady days prior to the financial meltdown. Effectively the most active lenders in the market are those without legacy issues. The recent De Montfort report highlights the huge funding gap. Around £50 billion of UK commercial property loans are in breach of their financial covenants or in default, with a further £160 billion of debt due for repayment over the next five years. No one knows how the banks and the market will deal with this potential time bomb.
Ian Paul: In the next 12 months we do expect to see more UK funds and overseas investors bidding for sites. But opportunities are still limited. We have been acting on numerous new fund set ups and for existing funds. So far, the banks have been reluctant to force sales and the status quo has been helped by a low interest rate environment which is in contrast to the last recession. But, as land prices rise, we are likely to see more distressed assets coming onto the market. As always timing will be everything.
Stephen Hughes: The dynamics of the development process have been changed by the scarcity of development finance and the amount of equity that clients now have to find. Banks are more cautious and although funding is available for pre-let commercial development it is not readily available for speculative development. We are going to run into a real shortage of development supply, particularly in central London. But we are beginning to see signs of a return to development, with schemes being dusted off and a few skyscraper projects back on track. For those with equity there will be opportunities to make good returns.
Daniel Farrand: It's clear that for developers the sustainability agenda will remain on track despite the economic downturn. Interestingly it is often the corporate occupier or retailer driving the sustainability agenda and insisting that developers meet their standards and the large corporates have to tick the CSR box if they are to move their staff to new premises. Green leases are definitely not a luxury and occupiers are increasingly aware of what they are spending on energy.
Daniel Levy: Now more than ever is the time for working existing portfolios. Our clients have had to be more resourceful and we have been helping to create value by using the right tools in the litigation kit to put them at the front of the queue when tenants run into financial difficulties, do not wish to settle their liabilities quickly or where opportunity exists and needs firm pressure for it to be realised. We have an assertive style, make good on our threats and work to ensure that litigation - like investments - pays a return for it to be continued. Inevitably we are acting on more dilapidations, break clauses and professional negligence cases; and prepacks and CVAs continue to be an issue.
Dean Poster: A further symptom of the cycle is the number of property sector takeovers and mergers and there will no doubt be further consolidation in the sector. For these to work it's important that they are cultural matches as well as a good fit financially. It is a time of opportunity and a downturn is traditionally a time when many decide to go it alone. So it comes as no great surprise that a number of stars have been leaving property companies and agencies to pursue new opportunities.
Nick Doffman: We are finding that property investors are increasingly getting together to form "club" arrangements. For instance that put together by Moor Park Capital Partners to carry out their â‚¬403 million purchase and leaseback of 378 Spanish banks. The club includes Anthony Lyons' and Simon Conway's Matterhorn Capital, the Livingstone brothers' London & Regional, London based Ombeter Properties and two hedge funds, Och Ziff and Fortis. Others are also using a personal approach to raising equity rather than going down the traditional route of employing a placement agent.
Susan Freeman: And the willingness to form new relationships has given us the opportunity to add more value in our role as facilitators. We are able to leverage our connections to bring investors together and to introduce new sources of equity. We have also been seizing some opportunities of our own. Recent hires into our real estate group include five new partners and assistants from City firms which has helped put us in a strong position to ride the next wave.
Ned El-Imad: Our residential team has found that prime central London residential property has continued to perform well. The market has been buoyed by overseas investors, particularly from Asia. They are attracted by a favourable exchange rate and a preference to have their money in bricks and mortar rather than attracting minimal interest in the bank.
Nick Doffman: Of course London has its own specific issues. It is vital that London remains an attractive environment for international business. The new banking levy or an unattractive tax regime could easily put London at a competitive disadvantage as a world financial centre. New development is essential to the capital's growth and it is good to see a wave of opportunities coming through in the wake of the 2012 Olympics such as Capital & Counties' redevelopment plans for Earls Court and Olympia - a scheme bigger than Canary Wharf.
Development and Urban Regeneration
Planning and Environment
Real Estate Dispute Resolution
In today's challenging retail environment, there is one small piece of good news for shopping centre operators: since the High Court's decision in Land Securities plc v Registrar of Trade Marks, it is now much easier to register trade marks such as "Westfield", "Meadowhall" and "Bluewater" for the multifaceted services offered by a modern shopping centre.
It is only in the last decade that the UK Intellectual Property Office (UK IPO), the government body responsible for administering the system of registered trade marks, has started to recognise the concept of "retail services".
Prior to that, a large scale retailer, such as Sainsbury's or Debenhams, could only seek protection for their trade marks in relation to the own brand goods that were sold within their stores. This greatly increased the cost of protection as it would necessarily encompass many of the 34 official "classes" of goods with the resulting multiple official class fees.
This led to a logical tension, in that many retailers who did not produce "own brand" products never actually used their trade marks upon the goods they sold, which always bore the trade marks of their end producers.
The acceptance of "retail services" as a form of service, in relation to which a trade mark could be applied, provided a sensible basis for the registration of the trade marks of supermarkets, department stores and shopping centres. However the complex wording that the UK IPO was willing to endorse only applied in relation to the goods being sold. No protection was available for the many "value added" offerings that are to be found in modern shopping centres, such as Lakeside, Bluewater and Westfield.
The current state of play
The Land Securities case paved the way for the protection of trade marks in relation to diverse services provided within a shopping centre or mall such as restaurants, cinemas, child care, language assistance and car cleaning.
This decision acknowledged the fact that all of these services may be provided within the modern shopping centre environment, and form an integral part of the offering. However, it also recognised that the provision of, for example, entertainment services in this set-ting is perceived differently from a cinema that is not operating under the umbrella of a shopping centre.
Why this is important
Modern shopping centres are becoming less of a location and more of a destination. Rather than simply being a collection of shops, the modern shopping centre also provides a mixed range of entertainment opportunities and other value added services.
This provides a bricks and mortar retail equivalent of a "multi-media experience" and gives the shopping centre something to offer over their internet competition. This can intrude even further into the "etail" field with associated social networking support promoting events, product/collection launches, special offers and services including guiding a user around the individual retail units to "get the look" - providing a real world version of the approach taken by online retailer ASOS.
As such there is increasingly much more of a "lifestyle feel" surrounding shopping centre brands that has them operating on a much higher level than simply a name on a motorway exit sign. Global brands such as "Westfield" are no longer used for one-off developments, but are reproduced and transferred across multiple sites in many countries.
UK trade mark registration provides a high level of security for a brand owner in terms of expanding and operating across the UK under their trade marks. By contrast, any reliance on common law rights such as passing off is strictly limited to the area in which you are already established.
This freedom to operate is clearly valuable to both potential investors in and purchasers of any shopping centre or mall operating company. Proper trade mark registrations can therefore represent valuable assets for such a business.
In addition, a carefully planned IP protection strategy has the potential to prevent competitors taking a "free ride" on the back of a retailer's marketing efforts, including distinctive aspects of the design and "trade dress" of the retailer's environment. If used carefully, this can help to maintain a real competitive advantage.
It will be interesting to see where the developing concept of "retail services" takes us next. There is certainly scope for a stronger brand focus in other "umbrella" developments such as outdoor retail parks. There may even be scope to apply a similar logic to prestigious residential developments where a strong on-site value added service offering, such as a gym or restaurant, forms a unique selling point.
Dispute Resolution: Intellectual Property
Trade Mark Attorney
Prescriptions for fast-acting relief
The tax aspects of a property transaction should always be considered carefully, but never more so than in the current market. Both sellers and buyers need to be aware of the opportunities which are available to enhance their returns, and must likewise be familiar with the pitfalls which can diminish them.
What is "consideration" for stamp duty land tax purposes?
Stamp duty land tax (SDLT) arises by reference to the "chargeable consideration" given for a transaction. This includes the price paid by a buyer; this much is obvious. However, in the SDLT world, life is never straightforward, and there are various occasions when SDLT is due by reference to the "market value" of the land rather than by reference to the actual price paid. Here are three examples of when this may apply.
1. Transfer to a connected company
This "market value" rule applies when land is transferred to a "connected" company - broadly a company which the seller controls. This is to stop individuals from transferring land to a company for £1 (with no SDLT) and then selling the shares in the company, giving rise to only 0.5% stamp duty (if a UK incorporated company) or potentially no stamp duty at all (if a non-UK incorporated company). Of course, transfers between companies in the same group may be eligible for SDLT group relief, which will need to be considered on a case by case basis.
Another example is a sale and leaseback. At first glance, the "market value" rule may not appear to make much difference - in an arm's length arrangement, the market value of the land acquired by the buyer will surely be the actual price paid. However, there is a key difference with market value treatment. SDLT is normally due on the VAT-inclusive price but, where there is a market value imputation, SDLT is due on the VAT-exclusive price only. On a £10 million property, a VAT-exclusive price will mean a saving of £70,000. HM Revenue & Custom's (HMRC) reasoning for adopting this treatment is that VAT cannot arise on a hypothetical price and must therefore be ignored - a useful interpretation from a taxpayer's point of view.
3. Building works
The definition of "consideration" for SDLT purposes is very wide and includes all "money or money's worth given" for the transaction by the buyer or a person connected with the buyer.
A buyer of land who agrees with the seller to pay a premium and also agrees to develop a scheme on the site will, as a starting point, be liable to SDLT not only on the premium but also by reference to the value of the building works which are to be carried out. However, there is a specific relief which allows building works to be ignored provided certain conditions are met.
One condition is that the works be carried out on land "acquired or to be acquired" under the transaction or on other land held by the buyer. While this should not pose any immediate problems in respect of the scheme in the above example (since the buyer is constructing on land it will acquire) problems occur when, for example, the seller requires the developer to construct buildings on land owned by the seller. In this case, the first condition has not been met and so SDLT arises on the market value of these building works. Although there is no easy fix, a buyer should consider whether it can renegotiate the commercial deal so that it gets a lease of the land on which the building is to be constructed. Still, it is vital to keep in mind the SDLT anti-avoidance provisions.
A landlord of commercial premises may wish to "opt to tax" so that it can charge VAT to tenants (the rationale being that it can then recover its associated VAT costs). However, be mindful that opting is a two stage process - the landlord must make the decision to opt, and then notify HMRC. It is essential that these formalities are observed, as the Tax Tribunal is littered with examples of cases where HMRC has refused to accept that a person has opted to tax as a result of the procedures not being adhered to. This can be disastrous from a VAT recovery point of view.
You should also consider carefully whether a transaction can qualify as a Transfer of a Going Concern (TOGC), which presents both a cash flow and SDLT saving (since a TOGC is outside the scope of VAT). People are sometimes surprised to learn what can comprise a TOGC. The legislation dictates that the seller must be carrying on an "economic activity" which will be carried on by the buyer. In theory, a bare site which has a huge development value may still qualify as a TOGC if the seller has let a small corner to a tenant for only £1,000 per month (perhaps to use as a car park).
Tax issues are complex but important to understand. Ensuring that transactions are structured in a tax-efficient manner, and that all available tax reliefs and exemptions have been used in the most effective way, could save you more than you realise.
Development and Urban Regeneration
Real Estate Taxation
A Very Tangled Web: The perils of social networking in the workplace
A wave of virtual networking platforms is providing numerous opportunities to expand business and social relationships. Facebook alone has more than 400 million active users globally, according to its website, and a third of all internet users log on to Facebook in any given day. However, as the Trades Union Congress (TUC) has noted, employers are not sure how to respond to the challenges posed by social networking sites. It fears that the UK's Facebook users are "HR accidents waiting to happen". So what can go wrong?
Unlawful discrimination in recruitment
Employers should be aware that if they vet applicants by checking their social networking homepages, they run the risk of inadvertently discovering sensitive information about the individual, leading to claims of unlawful discrimination.
Employers should carefully consider whether they need to run 'Facebook checks'. They may decide to limit the checks to certain roles and only run the checks late in the process. To avoid falling foul of data protection legislation, the employer should inform the applicant of their intention to vet them, and weigh up whether the advantages gained are worth the potential claims that may follow.
Cyberbullying and vicarious liability
Employers may also face claims of unlawful discrimination in relation to cyber bullying â€“ where employees post bullying (and often discriminatory) comments online about their colleagues. The employer may potentially be held liable vicariously for its employees' conduct.
The best way of protecting against such claims is to put in place a policy which deals with conduct, to communicate this policy to employees, to train managers in relation to equal opportunities and harassment issues and to take appropriate disciplinary action against the perpetrators.
Monitoring and disciplinary proceedings
There are numerous instances in which employees have been sacked for posting derogatory comments relating to their employer or customers, as well as a number of "hangover" dismissals - where an employee's absence has been candidly explained in their status update and does not tally with the explanation given to the employer.
While employers may use evidence gain- ed from websites to support decisions they take about staff, employers should be careful how this is obtained. The privacy settings of social networking sites may make it difficult for them to obtain the evidence by chance; if information is given by a colleague of an employee, that colleague may face liability for breaching their "friend's" confidence.
One way in which evidence may be obtained and abuse of the system may be controlled is through monitoring. If the employer decides to monitor internet usage, this needs to be approached with care as unlawful monitoring can result in custodial sentences and large fines. Monitoring must be proportionate, communicated to employees and handled with appropriate technical safeguards. This is also relevant if an employer wishes to control employees' usage of social networking sites.
In our recent experience, 7% of all cases of data theft involved the misuse of social networking sites. Typically, employees invite the business's customers to be their contacts on sites such as LinkedIn shortly before leaving their employer, thereby retaining confidential information post employment.
We have obtained injunctions against employees who have misused their employer's information in this way, but this process can be complicated if the employee has an account under a pseudonym or the service providers of the websites are based in other jurisdictions.
What steps should employers take?
Employers need to put in place practical usage policies which clearly express their expectations. They should ensure that their contracts contain sensible confidentiality provisions and robust, enforceable restrictive covenants.
If employers allow employees access to social networking sites but are concerned these may be used other than purely for networking purposes, they should consider requiring employees to set up work-only accounts that are relinquished when they leave the firm.
Above all, employers need to recognise that the way in which the web is being used is changing, and that they should take care to keep up with these changes.
Start-Ups and Break-Ups
In a time of change what are the legal consequences for employers and employees?
As a new political climate sweeps across the country, many in the property industry are considering leaving their existing employment and setting up their own businesses. In recent months, teams have been springing up from DTZ, CBRE, Savills and others, spawning new agencies such as Hanover Green, H2SO and MMX. A number of start-ups have also emerged from the ranks of our largest property REITs.
People are seizing the opportunities in the belief that the bottom of the property cycle has arrived or is even behind us, and that 2010 is an opportune time to leave the confines of the large agency or property company and set up business themselves. But both employees and employers who are affected should seek legal advice at an early stage.
Preparing for Departure
Employees will need to carefully consider the duties and obligations to their current employers. The relevant provisions will be found in the employment contract. There are likely to be a number of restrictive covenants which are intended to protect the employer's business from departing employees - in particular, there may be provisions prohibiting an employee from competing with his or her employer during and after employment and, following its termination, from soliciting clients and poaching staff. There are also likely to be express provisions relating to confidentiality.
In many cases, employees will only be willing to take the risky step of foregoing a regular monthly pay cheque for a start-up operation (and in the first year, a minimal income) if they know that their clients are likely to join them. Inevitably they will have made informal approaches to their closest clients to gain comfort that they will be followed to the new venture. Clients on occasion will also approach the employee to see if they are willing to leave their employment and set up on their own in order to reduce cost, while keeping the same personalised level of service.
However, employees who discuss their future plans with clients are likely to be acting unlawfully. It is easy to get caught. There are instances where employees believe that their Hotmail or Yahoo accounts through which they have made their departure arrangements are secure, only to find that the employer has (whether lawfully or unlawfully) hacked in to their email accounts and located their plans to depart. They may then suspend the employees and threaten to injunct the new venture from commencing business. Employers may also notify potential funders of the new business that the departees are subject to enforceable restrictions in favour of the employer and that the proposed funders would be inducing a breach of contract if they continued with their funding.
This is not the best start to a new venture. Experience shows that where a well funded employer wishes to enforce its rights as a point of principle and to scare off other potential departees, suspension from the business, threatening solicitors' letters and the threat of an injunction may mean that the new venture never gets off the ground. Often, the departing employees are also unable to continue with their existing employment.
In addition, teams planning to leave together to join a new start-up or a rival must take extra care to ensure that they are not in breach of their obligations to their employer. Recent case law confirms the courts' willingness to protect employers in this situation.
Legal Structure for the New Business
There is a growing move towards start-ups using LLP structures as opposed to limited companies. LLPs allow members (partners) to enjoy the same tax status as if they were partners in a partnership, while affording them limited liability protection. Another important benefit is the saving of up to 13.8% for employers' national insurance contributions on members' salaries. An LLP agreement will need to be negotiated among the members.
Compromise with Employers - Negotiation
Regardless of the restrictions imposed on employees, once the sense of betrayal and disloyalty has passed, employers often realise that, while they may legally be able to prevent the departee from working for their clients, they cannot force the clients to continue to instruct them. In many cases, the employers are multidisciplinary organisations that work with their clients in a number of areas, and the start-up can only cover one aspect of the work. The relationship between employer and client could be harmed if the employer treats its employees badly.
After any hostilities have been overcome, arrangements for fee-sharing, mutual referrals, consultancy agreements and permissions to take junior staff are all matters for potential negotiation.
Partner, Corporate Group
+44 (0)20 7440 4722
Mishcon recruits SJ Berwin real estate duo
Nick Minkoff, Partner, Real Estate
Nick has a wealth of commercial experience gained from many years acting for a spread of clients including private property companies, property outsourcing companies, private investors and occupiers. He brings particular expertise in development projects and the purchase and sale of high value investment properties. According to Chambers UK 2009 clients talk about Nick in "glowing terms": "He has done some exceptional work and is capable of dealing with the most complex and demanding matters." This year Chambers endorses Nick as "an excellent commercial adviser who really appreciates his clients' goals and needs".
Stephen Hughes, Partner, Real Estate
Stephen has significant expertise in all aspects of commercial real estate work including high value portfolio acquisitions and disposals, development work, joint ventures and structuring having acted for a broad range of UK and overseas clients. Chambers UK describes Stephen as having emerged as "a rising star who has tremendous experience for his age" and lists him as one of the up and coming individuals in the real estate sector.
Daniel Farrand, Head of Planning and Environment
Daniel has extensive experience in handling the planning aspects of complex and high profile developments and property deals, working with master developers and major property owners as well as acting for a range of investors and retail occupiers. Typically this work covers planning agreements, applications and appeals (including environmental impact assessments), inquiry work, judicial review and enforcement. Daniel also advises on compulsory purchase, highways, environment and related public law.
Jason Tann, Associate, Real Estate
Jason's practice covers a wide range of mainstream real estate work, development work, real estate finance, corporate real estate and property and asset management arrangements. Jason acts for a range of clients from FTSE 100 and 250 listed property companies and pension funds to private investors and developers to banks, hotel owners, operators in the leisure sector and occupiers. Jason is a founding member and treasurer of the Commercial Real Estate Legal Association.
Louise Tainton, Solicitor, Real Estate
Louise has transactional experience in all aspects of commercial real estate including property investment sales and acquisitions, development work portfolio management and corporate real estate. She also has a full range of management experience relating to landlord and tenant matters, acting for both landlords and tenants. Her clients include institutional investors and private property companies.
Dean Poster, Partner, Corporate
Dean's practice focuses on cross-border mergers and acquisitions, and on property related corporate work, with client companies coming from a wide range of industries. In terms of strict property work, he has facilitated deals in excess of £1.5 billion. Ranked as a leading lawyer for M&A deals between £50 million and £250 million, The Legal 500, 2009 has this to say: "Clients attest that Dean Poster is 'one of the best lawyers we have ever encountered'." Dean joined the Firm from Orrick Herrington & Sutcliffe.
Richard Gerstein, Partner, Real Estate Litigation
Richard specialises in construction and engineering disputes including adjudication, arbitration and litigation. He has particular expertise in construction and engineering contracts, warranties, development contracts, consultant appointments and funding agreements. Richard is also an expert in commercial dispute resolution including directors' and shareholders' disputes, professional negligence and commercial contracts disputes, especially in the biotechnology sector. Richard is a fellow of the Chartered Institute of Arbitrators and a member of the Society of Construction Law.
Jonathan Legg, Partner, Real Estate Tax
Jonathan, who recently joined from LG, has experience of all areas of corporate tax and specialises in property investment, development, finance and funds work. He acts for a variety of institutional clients, investors, developers, local authorities and charities, advising on both direct and indirect taxes including stamp duty land tax and VAT. Jonathan is an associate of the Institute of Indirect Taxation (being an examiner for the 2010 examinations) and is a member of the VAT Practitioners Group and the Stamp Taxes Practitioners Group. He is recognised in Chambers as a notable practitioner.
Nick Strutt, Solicitor, Real Estate Finance
Nick is a real estate finance specialist with over eight years' experience in advising financial institutions, funds, developers and investors on all aspects of real estate finance transactions, including in relation to bilateral, syndicated, club and staple financings. In the last two years, Nick has primarily advised on restructurings, refinancings, enforcements, intercreditor issues and general work-outs for clients in the banking sector. Nick moved from Macfarlanes in July 2010 to join our growing Real Estate Finance group, where he will be working closely with partner Luke Morris and his team.
Jonathan Warren, Solicitor, Real Estate Litigation
Jonathan specialises in contentious issues relating to commercial and residential property, acting for commercial landlords and tenants, retailers and restaurateurs. He has expertise in dealing with all issues arising from the landlord and tenant relationships including lease renewals, break notices, dilapidations and breaches of covenant.
Mishcon in the Press
The Lady's not for inviting to tea
Squatters who set up home in a £12m Belgravia house within sight of Baroness Thatcher's Chester Square, SW1, residence must be regretting sending her a cheeky note inviting her round for tea. When bailiffs arrived to retake possession and change the locks last week, they were accompanied by members of the Iron Lady's heavily armed security detail as well as Belgravia police.
Mishcon de Reya's head of property litigation, Dan Levy, who acted for the owner, said: "The client was pleased enough we obtained an order in a record 14 days, but to have Baroness Thatcher's security detail lend a hand was a real plus. I guess it's all part of community policing in Belgravia."
Estates Gazette, 24 October 2009
Mishcon de Reya has launched a unique range of products, under the umbrella MISHCON PROTECT™, designed to reduce the cost of litigation. The scheme protects clients against the risk of having to pay opponent's costs, and their own disbursements, should a claim not succeed.
Mishcon de Reya New York LLP opened it's office in Jan 2010
A Landlord's Masterclass: Essential Tricks of the Trade
Mishcon de Reya co-hosted another in its series of events with Property Week. The latest, entitled "Landlord's Masterclass: Essential Tricks of the Trade", lifted the veil on the secrets of getting the most out of your property portfolio. The eminent panel included Jonathan Seitler QC, Daniel Levy, head of real estate litigation at Mishcon de Reya, and Tony Lorenz of the Lorenz Consultancy. An invited audience engaged in a lively Q&A session chaired by Property Week editor Giles Barrie.
Deals and Dealmakers
Our Real Estate Team attended MIPIM 2010
As confidence returns to the M&A market, the Financial Times has launched 'Deals and Dealmakers', an editorial series supported by Mishcon de Reya. This is the first time a law firm has partnered with the FT on a publishing project.
The 2010 Norwood Property Lunch, which attracted more than 500 professionals from some of the country's biggest firms, beat its previous records by raising an outstanding £500,000.
Susan Freeman provided a daily blog of the week long event which was featured on the Property Week website.
The Twenty Ten Party
The Mishcon de Reya Real Estate group hosted their annual party at Summit House. Braving torrential rain, a record 300 guests joined us to share their predictions for the year ahead.
Head of Real Estate Team
Head of Real Estate Litigation
Head of Corporate
Head of Employment
Head of Dispute Resolution
Head of Mishcon Private ™
With long-standing expertise in the property sector, Mishcon is nonetheless a forward-thinking and dynamic firm that offers a rounded service thanks to its well-co-ordinated capabilities in the corporate, finance and tax sectors.
A tightly run practice with excellent credentials.